Why Bernstein’s Toni Sacconaghi is bearish on Apple in a recession

“The companies in our universe vary widely in business composition, and we maintain that those with the most recurring revenue and profit are least at risk.”

From a note that landed on my desktop Saturday (sent to Bernstein clients Thursday):

During the Great Financial Crisis, virtually every hardware category (servers, storage, PCs) saw 20%+ revenue declines in 2009. That said, the companies in our universe vary widely in business composition, and we maintain that those with the most recurring revenue and profit are least at risk. For instance, 60%+ of profits are recurring at IBM, which saw limited EPS revisions and outperformed by 2000+ bps during the GFC. In contrast, companies with more transactional business models such as Dell underperformed by 2000+ bps. Currently, IBM and HPE screen best in terms of recurring profits.

So how do we think about our stocks in the face of a potential recession? IBM’s financials are very likely to hold up best, though its stock price may already be reflecting it (EV/FCF = 15x). We continue to rate DELL and HPE outperform – We see risk/reward on AAPL and HPQ as neutral to potentially negative…

Apple – most transactional revenue model. Apple has been the poorest performing stock in our IT hardware coverage YTD, driven by valuation (AAPL entered 2022 trading at 30x P/E, a 40%+ premium to the market) and increasing concerns about its consumer exposure. Looking forward, Apple is the most transactional company we cover (an estimated <10% of revenues and profits are recurring, from select parts of its services portfolio) and its valuation remains elevated vs. history (20x P/E or 31% premium to the market Exhibit 19) and its FAAMG peers. Bulls argue that Apple’s premium price positioning make it less vulnerable to a recession, while bears assert that Apple over-earned last year amid the pandemic, and profits will invariably mean-revert over the next few years. We lean more towards sentiment in the latter camp, and see risk-reward on the shares as neutral to modestly negative.

Maintains Market Perform rating and $170 price target.

Cue Exhibits 2 and 12:

apple sacconaghi recession bear

apple sacconaghi recession bear

My take: IBM’s over-performance is interesting, but given how many people buy the latest iPhone each year and trade in — or hand down — the old,  iPhone purchases may be more “recurring” than Sacconaghi allows.

14 Comments

  1. Miguel Ancira said:
    This is the moment where he feelss vindicated, but it is temporary. I was waiting for this headline. Predictable.

    3
    June 18, 2022
  2. Jerry Doyle said:
    I’m just surprised that Toni S’s PT is not $150. If you examine how he has increased his Apple PT above ($170) in comparison with where brother Toni has had Apple’s PT historically, then Toni S seems to be recognizing appreciatively Apple’s Services business.

    0
    June 18, 2022
  3. Fred Stein said:
    This explains it all. Toni sees Apple as a hardware IT company. He compares Apple to other companies that lack Apple’s innovation and deep competitive advantages. IBM, Dell, HPE, and most other in that group, basically sell to their installed base. Apple’s customer base keeps growing, often at the expense of competitors; And Apple expands in new geographies. Apple emerges even stronger from any global economic turbulence.

    Still the market’s over-reaction and worries may persist for a while.

    4
    June 18, 2022
    • David Emery said:
      Not only that, but he also Very Much underestimates the stickiness of the hardware markets Apple is in. Phones are ubiquitous, the last couple of days I’ve seen stuff that presumed -everyone has a smartphone-. I suspect most everyone with an Apple Watch wouldn’t leave home without that, and would replace it immediately if it was lost or broken. Laptops/tablets are required on a per-person basis for work or for school.

      Now update cycles might well increase, but the market demand will NOT go away.

      1
      June 18, 2022
      • David Emery said:
        HPE and IBM are in the ENTERPRISE MARKET. Apple is NOT IN THAT MARKET. Dell is in both. Comparing Apple to IBM and HPE is JUST BIZARRE. More than anything, this is a reflection of Toni’s IGNORANCE of market definitions.

        Let’s compare Bernstein to Kimberly-Clark, while we’re at it. (I leave it for the reader to figure out what characteristic/use/market those two have in common.)

        1
        June 18, 2022
  4. George Ewonus said:
    Toni Sacconaghi is bearish on Apple – I’m amazed!

    3
    June 18, 2022
  5. Michael Goldfeder said:
    Paralysis by analysis is the Toni S. formula. After being so categorically incorrect on Apple for the past several years, I will always remember his mea culpa on CNBC when he finally admitted he was wrong. Based on his track record for constantly being “wrong” about Apple, he brings to mind the sage words of NFL Coach Bill Parcells who responded when asked about his team’s recent performances: “You are what your records says you are!” That’s where Toni S. lands!

    3
    June 18, 2022
  6. Last year 75% of Apple Watch customers were new to Apple. I watched two people buy an Apple Watch & then switch from Samsung to iPhone in my my immediate social circle. Recurring revenue from a constantly growing customer base defines Apple’s core strategy moving forward. Apple is an extremely difficult firm for analysts to pigeonhole.
    One stark example: A 3rd party vendor, Rune Labs, just received FDA approval (510(k) clearance) for their StrivePD software that uses Apple Watch to collect and measure data from Parkinson’s patients. I expect a tsunami of various medical applications for the Apple Watch in the years ahead. Measure that analysts!

    1
    June 18, 2022
  7. Adam Stein said:
    With this kind of commentary, why would he keep a 170 price target?

    1
    June 18, 2022
    • Fred Stein said:
      Yes, good question. I wondered too. Here’s a guess.

      Toni has had to recant many times for his absurdly low PTs. To avoid that risk, he set a PT that’s below the average and well within the pack.

      0
      June 19, 2022
      • David Emery said:
        That’s basically an assertion “there is no actual analytical basis for the estimate.” And I would certainly believe that. Any competent analyst with a track record of failure would either rework his analytical approach, or abandon it.

        0
        June 19, 2022
  8. Rick Povich said:
    AAPL is always the first stock to get massacred because it’s a cash cow. People sell to retain money on a downturn and then buy back when the economy improves. I’ve owned the stock since the day Apple announced Steve was coming back and have weathered myriad selloffs like this. Its many other investments that are less dependable, predictable and valuable.

    3
    June 18, 2022
  9. David Drinkwater said:
    It’s because he’s a negative ninny, but he is also clearly wrong about his recurring revenue theme.

    I have lots of retired iPhones in my possession, going all the way back to the iPhone 3G. I have several residual MacBook Pros (I’ve actually turned more of those in just to reduce life clutter). I’ve got a wristful of Apple Watches, three iPads ….

    Apple has a very strong recurring revenue stream.

    0
    June 19, 2022

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